Poland’s economy has pleased investors and other stakeholders with a stream of positive data over the last few weeks. Industrial production grew 9.8% in November 2009 compared to the same month a year ago, confounding analyst predictions of a 3% contraction. Monthly retail sales grew a better-than-expected 6.3% year-on-year, mainly thanks to an 8.2% rise in car sales. These developments will generate new tax revenues that may push the 2009 budget deficit down to around PLN 24-25 billion instead of PLN 27.2 billion, Finance Minister Jacek Rostowski said. His optimism was shared by National Bank of Poland (NBP) board member Zbigniew Hockuba, who thinks that fourth-quarter GDP may rise as much as 3% year on year. Investor optimism helped bring in more than €3 billion in a Eurobond sale on January 11, triple the amount that the government had anticipated.


Government finances will face difficulties in both 2010 and 2011. The European Commission forecasts the budget deficit could be 7.5% of GDP this year 7.6% next, edging further away from the Maastricht criteria limit of 3% of GDP. Unemployment shot up to 11.4% in November and is expected to run as high as 13% this year.



Analysis and Forecast: Decreasing Risk


While the mood for 2010 is optimistic, there is cause for concern. Government and NBP officials may be proud of Poland’s forecast-defying jump in retail sales, but higher unemployment could nip this trend in the bud as jobless Poles cut spending. The administration’s biggest challenge is to find new sources of revenue: The government debt-to-GDP ratio this year will reach 55%, the maximum level allowed by Poland’s Constitution. (The EC predicts Poland’s ratio will exceed the 55% threshold this year).


The main risk is that the 2010 presidential election may make the government reluctant to implement necessary, but potentially unpopular economic measures. As Political Capital has mentioned in the past, state asset sales represent one of Poland’s most important revenue streams. 2010 started well, as the government raised PLN 2.06 billion (€512.2 million) by selling 10% of copper producer KGHM. However, domestic sentiment against privatization is growing, fueled partly by President Lech Kaczyński and the Law and Justice Party (PiS). This may make the government lukewarm about selling further asset sales. Should an anti-privatization protest break out, Prime Minister Donald Tusk is unlikely to force the issue lest he lose his frontrunner status in the presidential race. Also, the privatization deals themselves may fail to materialize, as happened when the sale of the Warsaw Stock Exchange (WSE) fell through at the last minute. Treasury Minister Aleksander Grad is now proposing that WSE’s privatization take place in the last quarter of 2010.


The government is also mulling the ultra-risky idea of redefining what qualifies as “public debt” in order to sidestep the 55% constitutional limit. Chancellery Minister Michal Boni put this idea on the table in a December 2009 interview with Polish state radio. Such a move would not be seen as “creative accounting’, because every member of the Organization for Economic Cooperation and Development can define what exactly constitutes as public debt, Boni claimed, citing an OECD adviser. This move could prove disastrous. One of the main reasons that investors trust Poland is because the Constitution guarantees the debt-to-GDP will stay below 55%, effectively tying the government’s hands. Should the government follow through with its plan to redefine “debt,” Poland would lose one of its main advantages over its regional peers. The country has recently been trying to attract foreign investment by touting itself as the most economically stable country in the region.



Source: Central Statistical Office